 Mathematical Finance and Statistics Problem

Subject Mathematics Applied Statistics

Question

Imagine that you have just won Illinois’ Little Lotto lottery. You have the option of receiving either:
• Option A: \$500,000 right away or
• Option B: 30 annual payments of \$40,000
If you choose option B, then your first payment will come immediately, the second will come one year from now, the third will come two years from now, etc. Based on your own personal preferences (to be reflected in your discount rate), which option would you choose and why? Be very clear as to how you are valuing each option. Ignore any tax implications for this problem.

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Suppose my discount rate is 5% which is already very conservative measure as today's interest on personal saving is less than 1%. Then, the present value of option B to become larger than Option A takes 19 years according to my calculation. I would rather get a half million dollars today and take a chance with investment on myself doing more education or starting up a new company or even funding a new start-up company instead of waiting NINETEEN years to get the equivalent amount of option A....

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